MANAGEMENT DISCUSSIONS AND ANALYSIS REPORT

Industry Overview

The new government at the centre has infused optimism in the sentiments in general. The Reserve Bank of India has managed to bring down the CPI inflation to 6% A large part of disinflation has been on account of the slump in international crude oil prices. The Union Budget has also announced initiatives to boost investment. As a result, the outlook for the GDP growth has improved.

However, the unseasonal rains and hailstorms during the last month could have adverse impact on the agriculture and CPI inflation. Hence, what remains to be seen is the pace with which the acceleration takes place without increasing the inflation.

The Reserve Bank of India, in its endeavours to boost the pace of growth, reduced repo rate twice during the year. In its recent bimonthly policy, RBI has also indicated that it will continue to be accommodative in further easing of the rates if the inflation remains within the acceptable range and transmission to lending rates. It is therefore expected that the credit growth which had declined to 9% - lowest in the decade from 14% during the brvious year- is likely to improve during the new financial year. The asset quality which had deteriorated in general across the banking sector during the year under review, is expected to remain weak until economic growth gathers momentum. Even, net-interest margins are expected to follow the similar pattern after experiencing decline by the banking sector.

During the year, the regulator for Housing Finance Companies (HFC) - National Housing Bank (NHB) stipulated that HFCs are required to create Deferred Tax Liability in respect of Special Reserve being created by HFCs. As a result, the reported Profit After Tax (PAT) gets adversely impacted. IHLL is of the opinion that generally HFCs would not be required to utilise Special Reserve since specific provisions towards Standard Loan Assets and Non Performing Loans are already being made.

Hence, in all probabilities, such creation of Deferred Tax Liability will not get crystallized in the long term period but HFCs will report lower PAT due to such accounting entry. As per the new guidelines, even the debrciation had to be provided at a higher % impacting the PBT. However, these are being non cash provisions, the CEPs will not be affected due to these additional provisioning norms.

Market Scenario

There has been no change in the status of demand in the real estate sector and inventory of unsold properties had bulged to an all time high level. As a result, most of the lenders stepped up the disbursals of loans against existing properties. The spurt in mortgage loans, at a time when the economy has been at its lowest ebb could prove difficult while effecting recoveries. Hence the risks have increased in the housing finance market when the demand for new residential properties is very sluggish and property valuations have increased.

The market scenario has become much more discouraging and it is expected that the scenario might not change for a further period of 12 to 15 months.

However, in line with the Central Government's Housing for all - 2022 program, various State Governments have taken up housing projects in the affordable segment through their agencies viz. Municipal Corporations, Housing Boards, Development Authorities or through specialised agencies set up for the purpose.

IHLL is working with these agencies and lending to beneficiaries who are in the EWS and LIG segment. IHLL has been trying to minimise the risk while lending to these segments as much as possible by entering into Tripartiate agreements wherein the government agencies are a party.

Loan Products

IHLL's major focus has been to provide home loans to individuals and families for purchase, construction and extension. IHLL also provides loans for repair and renovation of houses and home loans to families in the self-employed category where formal income proofs are not easily available and the repayment capacity of such families are appraised based on their cash flows. Apart from extending home loans, IHLL offers loans for purchase and construction of nonresidential properties (NRP) and also offers mortgage loans against existing residential and commercial properties. IHLL offers developer loans on a selective basis.

Home loan products are being offered at fixed rates, giving customers an option to decide on the type of interest rate risk. V_)

IHLL is also planning to offers home loans under the Rural Housing Fund (RHF) scheme of NHB wherein loans are given in rural areas for select categories viz. Backward classes or Minority Community or Women owners or families having annual household income less than ' 2 lacs. Since NHB offers refinance at concessional rate of interest under the scheme, the ultimate rate of interest applicable on loans to beneficiaries is regulated with a cap on the sbrad.

Marketing Efforts

To ensure a deeper geographic reach, IHLL has been sourcing retail business through third party channels by appointment of IHLL Referral Associates. DSAs only source loans while IHLL retains control over the credit, legal and technical appraisals. Business sourced through GRAs was 40% of total disbursements made during the year.

IHLL is operating in two states - Gujarat and Maharashtra. IHLL has 2 retail offices across these two states. IHLL's staff strength as at March 31, 2015 was 18.

Portfolio

IHLL's portfolio is INR 1367.58 lakhs as of 31st March 15 (brvious year INR 1139.23 lakhs) for home purchase and construction in the retail home loan segment.

IHLL's portfolio is INR 611.03 lakhs (brvious year INR 300.96 lakhs) for builder and developers loan for long term housing projects.

Loans

The loan approval process at IHLL is centralised with varying approval limits. Approvals of lending proposals are carried out by retail sanctioning committees up to the limits delegated. Approvals beyond certain limits are referred to the Committee of Management. Larger proposals, as appropriate, are referred to the Committee of Directors, set up by the Board.

During the year, IHLL's total outstanding loans increased to INR 1978.61 lakhs from INR 1440.19 lakhs.

IHLL's outstanding home loans to individuals of INR 1367.58 lakhs and other loans to developers for long term housing projects of INR 611.03 constituted 69.12% and 30.88% respectively of the total outstanding loans. IHLL experienced a brpayment ratio of 7% - 10 °% approx in respect of individual loans.

Provision for Standard Assets, NPAs and Contingencies

As per the prudential norms brscribed by NHB for Standard Loan Assets, HFCs are required to carry a provision of 0.40% on Individual Home Loans, 1% on Individual LAP Loans, 0.75% on Developer Loans for residential projects and 1% on Developer loans for commercial projects.

Accordingly, IHLL has made a provision of INR 35 lakhs towards Loan Assets comprising Individual Home Loans, Individual NRP Loans and Developer Loans.

As per the prudential norms of NHB, IHLL has identified Non Performing Assets (NPAs) and made required provisions on such NPAs besides not recognizing income in respect of such NPAs. An asset is NPA if the interest or principal installment is overdue for 90 days. IHLL's NPAs as at March 31, 2015 were INR 40.39 lakhs in respect of Individual Home Loans. There were no NPAs under LAP and Developer Loans. As per prudential norms of NHB, IHLL is required to carry a provision of INR 35 lakhs towards such NPAs. However, IHLL has provided for these NPAs and as a result, IHLL's Gross NPAs are 2% (brvious year 4.01%) and Net NPAs are 0.50% (brvious year 1.61%) on the outstanding loans of INR 1978.61 lakhs as at March 31, 2015. IHLL thus carries excess provision of INR 3.16 lakhs as contingencies. During the year, IHLL has written off an amount of INR 12.83 lakhs in respect of individual loans where the recovery was difficult in the near future. However, IHLL continued the recovery efforts in respect of written off loans of earlier years and could effect recoveries of 0.65 lakhs in respect of written off loans.

IHLL's capital funds are well within the 20% limit stipulated by NHB.

Investments

The Investment Committee constituted by the Board of Directors is responsible for approving investments in line with limits as set out by the board. The decisions to buy and sell up to the approved limit delegated by the board are taken by the Managing Director, who is assisted by CFO. The investment function is carried out primarily to support the core business of housing finance to ensure adequate levels of liquidity and to maintain investment in approved securities as per the norms of NHB.

Considering the time lag between raising of resources and its deployment, the surplus funds are generally being parked with liquid fund schemes of mutual funds and short-term deposits with banks.

Borrowed Funds

IHLL has been raising funds for its lending activities from banks / FIs by way of term loans, from NHB by way of refinance. Endeavours at IHLL have been to maintain fixed rate borrowings with a view to minimise the weighted average cost of borrowings and maintain a healthy sbrad on its lending activities. While such a mix enables IHLL to sustain a healthy net-interest margin, it raises the risks of asset liability mismatch. To minimise the risk arising on account of such mismatch, IHLL has set internal norms on the quantum of short-term borrowings so that a prudent balance is maintained in keeping the cost of funds low to an extent that the risk arising from the mismatch could be managed.

The borrowings which are maturing within twelve months from the end of the year, constituted 25% of the total borrowings of INR 5 Crores (brvious year NIL).

IHLL achieved refinance sanction of INR 5 Crore from NHB (dated 22nd December, 2014) and disbursement happened on 24th June, 2015.

IHLL raised INR 5 Crore from NBFC namely MAS Financial Services Private Limited during the year. The outstanding balance of Term loan form MAS as at March 31, 2015 was INR 5 crores. The borrowing is secured by mortgage of a portfolio in favour MAS Financial Services Private Limited.

NHB Guidelines and Prudential Norms

IHLL has complied with the guidelines issued by NHB regarding accounting standards, prudential norms for asset classification, income recognition, provisioning, capital adequacy, concentration of credit, credit rating, "Know Your Customer" (KYC), Fair Practices Code, grievance redressal mechanism, recovery of dues, channel partners and real estate and capital market exposures.

IHLL had no investment in excess of the limits brscribed by NHB with any one Company or any single group of companies. IHLL has not made investment in any of the promoter group companies or in the stock markets.

IHLL's total borrowings as at March 31, 2015 of INR 5 Crore were within the permissible limit of 16 times the net owned funds. IHLL's Capital Adequacy Ratio as at March 31, 2015 was 110.68% as against NHB's brscribed limit of 12%. The Capital Adequacy on account of Tier I Capital was 109.63% while the Capital Adequacy on account of the Tier II Capital was 1.05%.

Inspection by National Housing Bank (NHB)

NHB, under section 34 of the NHB Act, 1987, carries out inspection of HFCs every year. NHB conducts combrhensive inspection of select few branches of IHLL and also inspects IHLL's lending, resource raising and accounting activities apart from the compliances with the Prudential Guidelines issued by NHB.

For the year 2013-14, NHB had carried out such inspection of IHLL for the financial position as at March 31, 2014. In this regards, while IHLL has complied with the observations of the regulator, IHLL would like to submit the clarification that an embedded software bundled along with hardware like Windows, Office etc. are in the nature of Fixed Assets and they are not Intangible Assets. IHLL had shown such software as Fixed Assets and debrciation is also being claimed as per the provisions under The Income Tax Act.

Risk Management

IHLL has formulated a risk management framework which lays the procedure for risk assessment and mitigation. The Risk Management Committee (RMC) comprises the Managing Director as the chairman and the members include senior managers holding key positions in the Company. The RMC apprises the Audit Committee of the key risks associated with the business of the Company and the measures to mitigate them.

The Audit Committee has been periodically reviewing the risk profile of the Company and evaluating the adherence by the branches / functions of the systems and processes in place for monitoring, evaluation, assessment and mitigation of risk through a systematic and effective audit programme. The observations of Audit Committee, if any, on the risk management are reported to the Board.

IHLL manages various risks like financial risk, operational risk, marketing risk, external risk and regulatory risks associated with the mortgage business. The critical risks which can significantly impact profitability and financial strength are credit risk, interest rate risk and liquidity risk. IHLL manages credit risk through internal credit norms.

Liquidity risk and interest rate risks arising out of maturity mismatch of assets and liabilities are managed through regular monitoring of the maturity profile.

Internal Audit and Control

IHLL has an adequate system of internal control in place which has been designed to provide a reasonable assurance with regard to maintaining of proper accounting controls, monitoring of operations, protecting assets from unauthorized use or losses, compliance with regulations and for ensuring reliability of financial reporting. IHLL has documented procedures covering all financial and operating functions.

IHLL has robust internal audit programme, where the internal auditors, an independent firm of chartered accountants, conduct a risk-based audit with a view to not only test adherence to laid down policies and procedures but also to suggest improvements in processes and systems. Their audit program is agreed upon by the Audit Committee. Internal audit observations and recommendations are reported to the Audit Committee, which monitors the implementation of such recommendations.

Statement of Profit and Loss

Key elements of the statement of profit and loss for the year ended March 31, 2015 are:

• Profit Before Tax down by 7% as compared to brvious year due to correction in the accounting methods / pattern.

• Profit After Tax before impact of DTL on Special Reserve down by 10% as against the brvious year.

• Profit After Tax down by 6% as against the brvious year.

• Current year income tax provision amounted to INR 24.25 lakhs as compared to INR 6.58 lakhs in the brvious year.

• The Earnings Per Share (Basic) was INR 0.51 for the current year as against INR 0.55 for the brvious year.

Human Resource

The enthusiasm of staff members continued to be high in sustaining positive growth of disbursements and in maintaining healthy recoveries. With the high level of commitment and loyalty by staff members, IHLL is confident to face the challenges of the tougher market conditions and sustain the growth.